Unit 2

Question 1

When there is a market failure - who steps in?

Answer 1

Government reaction to market failure

Question 2

Demand

Answer 2

Consumers try to maximize utility or maximize happiness. To do this, they will buy a certain amount of goods that bring them the highest level of utility.

Question 3

Demand curve

Answer 3

a function that shows the quantity demanded at different prices (how much of a given good do consumers want to purchase at a certain price; how much they want to consume for that good); slope downward

Question 4

Downward sloping demand

Answer 4

reason as prices fall, the amount the consumers demand increases (they want to buy more when the price goes down)

Question 5

Example of demand curve

Answer 5

Which demand curve?
apples @ $5 = we buy 2.5 apples, @ $3 = we buy4 apples; apples are cheaper than oranges it makes senses that’s what I’ll spend my money on; shift away from oranges to apples because oranges are more expensive ( law of demand)

Question 6

The Law of Demand

Answer 6

the idea that demand curves slope downward. As price goes up, demand goes down. Many public health interventions exploit this law.

Question 7

Law of demand (as result of soda tax)

Answer 7

Soda tax means people have to give up more stuff to drink soda, therefore they consume less soda

Question 8

Law of demand (as result of cigarette tax)

Answer 8

Because people have to give up more to consume a pack of cigarettes, they will likely consume less cigarettes (decrease the demand)

Question 9

Shifts in demand curve (either inward or outward)

Answer 9

The demand curve shows how quantity demanded changes as the prices changes, holding other things constant (the market stays fixed). When those other things change, this causes the demand curve to _____

Question 10

Factors that cause a shift in demand curve:

Answer 10

• Income
• Price of related good (substitutes + complements)
• Changes in consumer tastes or preferences
• Changes in population composition
• Changes in expectations about future prices or other factors that affect demand

Question 11

supply

Answer 11

refers to the total amount of goods or services available to consumers

Question 12

Law of supply

Answer 12

Upward sloping supply curve ;Supply curves are upward sloping because suppliers want to sell things for as much as they can.

Question 13

Example of law of supply

Answer 13

the price of a good only changes the quantity supplied. Holding all else constant, at $3 an apple, a producer is willing to sell 2.5 apples, but when the price of an apple goes up to $6 an apple, the producer is willing to sell 5.5 apples. (the more apples you sell, you take more shelf space away from oranges and devote them to apples)

Question 14

What factors cause shifts in the supply curve?

Answer 14

o	Changes/New science and technology
o	Size of market
o	Government policies (taxes and subsidies)
o	Changes in price of relevant inputs
o	Seller expectations

Question 15

Competitive Equilibrium

Answer 15

occurs when profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices arrive at an equilibrium price.

Question 16

Equilibrium Price

Answer 16

the only price where the price is stable

Question 17

Surplus of supply

Answer 17

incentive to lower price

Question 18

Shortage of supply

Answer 18

• sellers have incentive to raise the price

Question 19

the Equilibrium Point

Answer 19

The intersection of the demand curve and the supply curve; resting point or market point

Quantity supply = quantity demanded

*At this point, there is no reason for the market to deviate.

Question 20

What does price signal about the product?

Answer 20

tells you how abundant or scare something is (important about how markets operate, when prices fall its telling the buyer that the good is more abundant, less scare so people buy more of it)

Question 21

Price cap

Answer 21

example: you cant sell bread for more than $1 because its an essential source of nutrients for people) == supplies are trying to maximize their profits (and how it intersect with their supply curve. More people want bread then people who are selling it and this leads to a shortage (less people are getting break compared to when it was $2)

Question 22

4 types of market failures

Answer 22

1. equity
2. lack of information
3. externalities
4. irrational consumers

Question 23

Equity (as a market failure)

Answer 23

Market failure example: more money being spent on drugs that are for wealthier people and not others like drugs for tropical disease – government should intervene

Question 24

Lack of information (as a market failure)

Answer 24

Market failure where demand curve is uninformed; doesn’t reflect what we should or should not know about something = lack on info leads to insufficient outcome
(Examples: misinformation about covid vaccine, window guards in NYC and passing letter grades for restaurant hygiene)

Question 25

Externalities (as a market failure)

Answer 25

exist when there’s a transaction between 2 parties and a 3rd party is effected by that transaction; big role in how marketing functions

Question 26

Example of externalities

Answer 26

• Example: air pollution : person bought car, store collected money but other people are effected by it (globally or in the air)
• Example: contagious diseases (covid) you make decisions about to purchase mask from store, and your decision effects other people because you are reducing the spread of covid (the market doesn’t account for this 3rd party being effected
• Example: deworming disease (slide 8), someone buying the drug for their child isn’t thinking about their child’s classmates. Study at schools for kids that got de-worming drugs vs. classmates that didn’t get the drugs; then compared those to schools where no one got the deworming drug